Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of the Congo
Our Congolese authorities would like to thank the Executive Board, Management and Staff for the support to the Democratic Republic of Congo (DRC). They appreciate the Fund’s swift response to their request for an emergency assistance under the Rapid Credit Facility (RCF). This assistance will be critical to supporting the authorities’ efforts to cope with the human and economic impact of the COVID-19.
The DRC was hit hard by the global coronavirus outbreak at a time when the country was emerging steadily from years of economic woes. The new government appointed in mid-2019 committed to restore good governance, fight corruption and initiate structural reforms for economic transformation. In this regard, the authorities renewed full engagement with the IMF and subsequently embarked on a Staff-Monitored Program in December 2019 while securing support under the RCF to boost the central bank’s international reserves. The COVID-19 pandemic has affected the economy of DRC significantly, through direct and indirect channels and as a result of riposte measures. In this context, the authorities are requesting an assistance under the RCF to support their domestic efforts. The disbursement will help reduce the financing gap and catalyze support from other donors.
Our authorities would have opted for a higher access given the financing gap as of now and the difficulty to secure additional funding at comparable cost as the RCF resources. Moreover, they expected the country to reap the benefits of the Board’s recent decisions to increase the annual access limit under the RCF’s exogenous shock window from 50 percent of quota to 100 percent of quota and to ensure additionality of Fund resources with a view to helping member countries meet their urgent and unprecedented financing needs due to the COVID-19.
Against this background, the authorities look forward to another disbursement under the RCF in due course to help them effectively address the effects of the continued fall in revenue and increasing COVID-19 related spending.
1. The Human and Economic Impact of the COVID-19 Pandemic
The DRC reported its first case of COVID-19 infection on March 10; as of April 18, the case count has climbed to 327, of which 27 cured and 25 fatalities. The Government’s emergency health response to the pandemic was swift and included thus far, containment and mitigation measures such as: suspension of all international flights; closing of schools, churches, bars and restaurants, ban on public gatherings; and limitation of public service to essential workers. The authorities have also prepared a COVID-19 national response plan to fast-track related health care delivery and procurements for medical supplies. They are also considering additional measures as more cases are confirmed.
The economic impact of the COVID-19 is being severe in the DRC. The country was affected early on by the effects of trade disruptions, notably with China, the main recipient of its mineral exports. Low global demand has caused a 20 percent fall in copper prices, the main export product, since the pandemic outbreak. Falling commodity prices and declining trade are having an adverse impact on import-dependent activities as well as custom and fiscal receipts. Furthermore, containment and mitigation measures are expected to have an adverse impact on many SMEs, including in the leisure sector – restaurants, hotels and amusement activities – which will pay a heavy toll to the pandemic.
These adverse developments are being reflected in deteriorating macroeconomic figures. Real GDP growth is projected to fall into negative territories, to -2.2 percent in 2020 – compared to 3.2 percent previously projected – from 4.4 percent in 2019. Public finances are in a dire situation as revenue continues to fall while health-related spending increases. The external position is also reflecting the decline in mining exports and reduced FDI flows. The ensued BOP financing gap is estimated at 1.3 percent of GDP. By the same token, international reserves are expected to fall to 3.6 weeks of imports compared to the 4.2 weeks target under the SMP.
The authorities expect a quick economic recovery by next year if the COVID-19 were to abate in the coming months. A more protracted pandemic with lasting effects on global demand would delay domestic recovery; containment measures may have larger-than-anticipated effects and hence would entail additional support to the economy.
2. The Government’s Policy Response to the Pandemic
Fiscal Policy and Debt Sustainability
The authorities’ main policy action is the relaxation of the 2020 fiscal stance to accommodate the impact of the COVID-19. The fiscal cost of the pandemic amounts to 1.2 percent of GDP and includes revenue losses, budget-financed outlays in the national response plan and shortfalls in treasury bills issuance. Domestic adjustment efforts were also made to prioritize COVID-19 related spending. In this regard, the government cut current spending excluding wages by about 2 percent of GDP. As well, the operating budget of ministries and public institutions was reduced drastically by 30 percent. Spending in key programs like free basic education was preserved alongside expenditures in health care. Furthermore, the authorities are taking preparatory steps to implement revenue-enhancing measures by the end of the year, should the pandemic recede. This include digitalization of tax procedures, VAT collection, and enhanced controls at the borders.
Our authorities welcome the conclusion of staff’s debt sustainability analysis (DSA) that DRC’s external and overall debt is sustainable, and that the country continues to be at a moderate risk of debt distress. Going forward, they remain committed to improving DRC’s stance on debt sustainability metrics, including higher and broad-based growth, increased domestic revenue mobilization, quality institutions for debt-carrying capacity and sound debt management.
Governance and Financial Transparency
The Congolese authorities put a high value on transparency and accountability in the management of pandemic-related expenditures, including the use of RCF resources. In this regard, they have agreed with staff on reinforced procedures to track COVID-19 related operations and expenditures, which include: elaborating a revised 2020 Treasury Plan with COVID-19 related expenditures and publishing budget execution monthly; publishing all COVID-19 related public procurement contracts and disclosing beneficial ownership information for contracts exceeding US$ 1 million; and conducting specific COVID-19 related audits.
The authorities are hopeful that the enhanced financial transparency measures will help secure adequate funding from other partners to close the financing gap and deliver an effective response to the pandemic.
Monetary, Financial and Exchange Rate Policies
Accommodative monetary and financial policies make part of the authorities’ response to the pandemic. The central bank (Banque Centrale du Congo, BCC) has reduced its policy rate and eliminated the reserve requirement on sight deposits to raise liquidity in the banking system. It has also created a new financing facility to increase credit to the economy. The BCC has taken additional measures to temporarily ease regulation, including postponing new capital requirements and allowing banks to restructure loans of affected borrowers. Likewise, digital payment technologies are being promoted to contain the spread of the virus through bank notes.
While taking measures to keep the banking system afloat to support economic activity in these difficult circumstances, the authorities are cognizant of the need to maintain the health and stability of the financial system. They will continue to monitor developments in the sector accordingly and stand ready to step up reforms when overall conditions improve.
In this period of heightened uncertainty, the authorities are committed to maintaining exchange rate flexibility, which serves the economy well as a shock absorber. At the same time, they are taking the necessary steps to increase foreign exchange reserves, including putting a halt on government financing by the central bank. Assistance from the Fund and other donors would contribute to this end.
The health crisis caused by the COVID-19 is being compounded in DRC by an economic crisis stemming from both the spillovers of dramatically slower global demand and the effects of the pandemic containment and mitigation measures. Our authorities have responded swiftly with measures to contain the spread of the pandemic and dampen its impact on the economy. They remain committed to resuming their macroeconomic adjustment efforts once the crisis subsides.
In view of the sizeable financing gap and balance of payment needs, and the authorities’ commitment to pursue the appropriate policies to mitigate the impact of the pandemic and pave the way for a quick and sustained recovery, we would appreciate Executive Directors’ support for a disbursement under the RCF.